Debt funding involves borrowing money from an investor or lender, knowing that it has to be repaid in future, along with the interest. Usually, debt funding does not incorporate any provision for ownership of the firm. Rather, small businesses that choose to go for debt funding accept a direct obligation to repay the money within stipulated period of time. The interest rate that is charged on borrowed money represents risk level that the lenders take by lending funds. Say for instance, a lender might charge relatively higher interest rate from a startup company as compared to the one that has been generating profit for several years. Although there are multitude of ways for small businesses for debt funding, including convertible debentures, private placement of bonds, industrial development bonds as well as leveraged bonds, a regular loan is the most common type of debt funding. Categorized as short term, long term or a credit line, they can be endorsed by co-signers, secured through collateral or guaranteed by the government.
According to experts, debt funding is a useful strategy, especially for organizations having good credit, along with stable history of revenues, cash flow as well as earnings. However, entrepreneurs with small business should act wise prior to opting for debt funding so as to avoid cash flow problems. Also, it is vital for each entrepreneur going for debt funding to primarily evaluate financial needs of the business and then estimate the percentage of total funds that are needed to be acquired from external sources. A well thought of business plan is crucial to plan for as well as obtain financing. It is advisable to opt for debt funding when the interest rates are low. When talking about the benefits of debt funding, they are manifold. Primary benefit is that it enables the founders to retain control and ownership of the company. Business owners can make strategic decisions and reinvest company profits. Another advantage is that it proffers high degree of financial freedom to entrepreneurs. Once the loan is re-paid, lenders have no claim on the business. Apart from this, debt paid on time helps enhance credit rating of small businesses, making it easier for them to acquire funding in future as well. Although a bit expensive over the short term, debt funding is less expensive for small businesses over the long term. Proactive CFOs offers complete assistance when it comes to debt funding. The professionals follow a vigilant approach to understand your business needs so as to provide you with right guidance. Besides debt funding, the company offers resident directors services to help you establish a new business.